The Hoosier Lottery, faced with slumping profits, is struggling to get more people to play ticket games — in a world of electronic gambling.

In the budget year just ended, lottery officials expect to see about a 5 percent decline in profits, which reached $199 million last year, according to W. Edward Benton, the lottery's chief financial officer.

So what's eating into ticket sales? Smaller Powerball jackpots, for one thing, something Hoosier Lottery officials can't control.

The approximately 22,000 illegal gambling machines found in bars and fraternal lodges across Indiana also hurt the lottery. State officials can do something about these machines — often called Cherry Masters — that resemble computerized slot machines.

As the state Alcohol and Tobacco Commission steps up enforcement against illegal machines in businesses with alcohol permits, the lottery is trying to figure out whether those machines could be the key to boosting profits.

Hoosier Lottery Executive Director Esther Q. Schneider has asked the attorney general's office for an opinion as to whether current law allows the lottery to offer new games, such as video lottery gambling. Schneider said she would implement such a plan only with legislative support.

"There is demand," Schneider said. "We're looking at all of the different ways we can increase revenue and our bottom line. How can we improve our existing games? What new ones can we have? Should we get rid of any?"

Until this year, state officials largely have ignored illegal gambling machines, except for fines that barely made a dent in most bar business.

But in the past year, with Gov. Mitch Daniels' support, the Alcohol and Tobacco Commission has become more aggressive. Since January, 525 machines have been disabled, and state officials have confiscated about $30,000, according to Dave Heath, the commission's chairman.

And soon, Schneider said, she may be forced to start her own crackdown, enforcing a law that says that anyone with a lottery license has to abide by all state laws.

"We have retailers who have come to me and who know this is a problem. They say 'we will remove them when you tell us to, but will you look at other ways to replace our revenue?' " Schneider said. "The end result is the same. The machines have got to go."

The illegal gambling market is big business, generating an estimated $200 million to $350 million a year, lottery officials guess. None of that is being taxed.

For some bars and taverns, it's key to economic survival — and has been overlooked for years.

"It was almost accepted. It was understood," said Joe Underhill, owner of the Southside Tavern in Loogootee in Southern Indiana. His bar had three or four machines, but since the State Excise Police threatened to shut him down, he's removed them. Business has slacked off because of it as fewer people come in to eat his food and drink his beer.

"They've all of a sudden changed to this zero-tolerance policy," said Underhill, who added that he wouldn't mind if the machines were legalized and taxed.

Capturing the market for video gambling machines could be a huge boon for the lottery, which sends about 29 cents of every dollar gambled back to the state for profits (the rest goes for prizes, marketing, and bonuses for retailers.) Since 1989, the lottery has netted the state $2.6 billion. Nearly $800 million went toward lowering license plate taxes, and nearly $300 million went toward helping fund public schools.

Schneider is also looking at whether to offer keno (a fast-paced numbers game she said she would only institute with legislative support). She wants to market the Hoosier Lotto more since it has a larger profit margin than scratch-off tickets.

The lottery also is looking to save money within the organization. About 20 positions have been cut and salaries readjusted — beefing up areas like lottery security while cutting positions like the statistician and the director of administration.

Schneider also has banned Post-It Notes because of the cost.

"I have a duty to return as much money to the taxpayers as possible," she said.

Editor: The Lottery Post editorial staff proposes that the Indiana Lottery's insistence on using computerized drawings may have something to do with their sales decline, and would explain the public's desire to seek alternative gaming experiences.  Reverting back to mechanical drawing machines could produce the marketing event necessary to rejuvenate Hoosier Lottery revenues.